The Affordable Health Care Act and It’s Impact on Your Retirement…

Posted on by in Estate Planning, IRAs, Medicare, Roth IRA, Roth IRA Conversions.

Now that the Affordable Health Care Act is deemed constitutional, the Medicare surtax that is scheduled to take effect on January 1, 2013 is likely.  Tax rates on certain passive income will rise to 43.4% from the current rate of 35%, and there is scheduled increases in the capital gains rates for both lower and upper income tax bracket taxpayers.  With taxes almost inevitably increasing, the appropriate response to buy your partner, Uncle Sam, out of your IRA at today’s lower tax rates.

As many of you know, for a long time I have advocated that making conversion of at least a portion of your IRA to a Roth IRA is a good idea for most taxpayers. Now, with the recent Supreme Court decision that the tax and locations of the Affordable Health Care Act, the benefits of the conversion become even more advantageous and more certain, particularly for upper income taxpayers. The benefits are making Roth IRA conversions can be measured in hundreds of thousands of dollars, even millions if you can stretch the life of the Roth IRA over multiple generations.

If you are interested in a detailed technical analysis of the Medicare surtax or the benefits of Roth IRA conversion, please call and ask our Client Service Coordinator Alice for more information.   We would be happy to provide you with an explanation or set up a meeting with  one of our professionals.

3 Myths About Social Security

Posted on by in 401(k), 403(b), Economy, Social Security and tagged , .

Myth #1: By the time I retire, Social Security will be broke.

If you believe this, you are not alone. More and more Americans have become convinced that the Social Security system won’t be there when they need it. In an AARP survey released last year, only 35 percent of adults said they were very or somewhat confident about Social Security’s future.

It’s true that Social Security’s finances need work, because over the long term there will not be enough money to fully cover promised benefits. But radical changes aren’t needed. In 2010 a number of different proposals were put forward that, taken in combination, would put the program back on firm financial ground for the future, including changes such as raising the amount of wages subject to the payroll tax (now capped at $106,800) and benefit changes based on longer life expectancy.

Myth #2: The Social Security Trust Fund Assets are Worthless.

Any surplus payroll taxes not used for current benefits are used to purchase special-issue, interest-paying Treasury bonds. In other words, the surplus in the Social Security trust fund has been loaned to the federal government for its general use — the reserve of $2.6 trillion is not a heap of cash sitting in a vault. These bonds are backed by the full faith and credit of the federal government, just as they are for other Treasury bondholders. However, Treasury will soon need to pay back these bonds. This will put pressure on the federal budget, according to Social Security’s board of trustees. Even without any changes, Social Security can continue paying full benefits through 2037. After that, the revenue from payroll taxes will still cover about 75 percent of promised benefits.

Myth #3: I Could Invest Better on My Own.

Maybe you could, and maybe you couldn’t. But the point of Social Security isn’t to maximize the return on the payroll taxes you’ve contributed. Social Security is designed to be the one guaranteed part of your retirement income that can’t be outlived or lost in the stock market. It’s a secure base of income throughout your working life and retirement. And for many, it’s a lifeline. Social Security provides the majority of income for at least half of Americans over age 65; it is 90 percent or more of income for 43 percent of singles and 22 percent of married couples. You can, and should, invest in a retirement fund like a 401(k) or an individual retirement account. Maybe you’ll enjoy strong returns and avoid the market turmoil we have seen during the past decade. If not, you’ll still have Social Security to fall back on.

Five Financial Tips for Women

Posted on by in 401(k), Estate Planning, IRAs, Life Insurance.

Five Financial Tips for Women

  1. Make it a Priority to Understand What You Already Have – For working woman, make sure you fully understand your employee benefits and your company’s retirement plan.  Make it a point to see what your short and long term disability and life insurance can offer you and then fill in the gaps with individual policies. You may be surprised what your benefits do and do not cover.  It’s better to know now then at the time you may need to use them.
  2. Fund Your Retirement Plan:  Most employers offer employees a retirement plan and you must take advantage of it. Make sure though that you consult with a qualified financial advisor when choosing your fund choices.  Leave the selection up to the professionals and review it once a year to make sure your maximizing your returns. Beyond your company’s retirement plan, look into getting your own IRA or Roth IRA, which allows you grow wealth tax-free through the course of your lifetime – it’s worth looking in to.
  3. Recognizing the Challenges is Half the Battle: There’s no doubt about it – women face obstacles that men do not.  Women still earn less than their male counterparts, live longer and are typically out of the workforce for 12 years, on average, taking care of children and now more than ever, aging parents. Recognize these challenges, set goals and build a plan to action to overcome your specific hurdles.  Things such as making a career move or initiating salary negotiations, refinancing your mortgage, opening up an IRA or Roth IRA and adjusting your risk tolerance on your investments can all make a powerful impact on your financial picture.
  4. Don’t be Afraid to Fire a Bad Advisor:  Let’s face it, there are thousands of financial advisors out there…some of which may suit you better than others.  Choosing a financial advisor is like choosing a doctor.  Choose a person who focuses on your needs and not there’s, someone who listens to your goals, keeps you on track and meets with you at least once a year to review your situation.  If you’re not satisfied with the relationship you have, move on!
  5. It’s Never Too Late:  Regardless of your age, there are ideas and options that can help your financial picture – we see it everyday.  There is no better time to start investing than right now. Make it a priority to meet with an advisor in 2011.  Ask people you trust to refer you to someone that listens and achieves results and get started as soon as possible.

Three Financial Pioneers Create the Power of Index Investing

Posted on by in Economy, IRAs, The Lange Money Hour and tagged , , , , .

The Conception of Index Investing

In 1974 John Bogle founded and created The Vanguard Group – now one the world’s largest mutual fund companies offering 120 different mutual funds holding over $1 trillion.  In 1975, Mr. Bogle championed the first low-cost, index fund which transformed the mutual fund industry crediting him with the title “Father of Index Investing”.    His investment philosophy was simple; it advocated capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.

Bogle felt that indexing was a logically compelling method of investing. “In the world of investing, there are very, very few sure things. But the closest thing to a sure thing is that the Wilshire 5000 index will outperform actively-managed funds by 1.5 to 2 percentage points a year over a sustained period. The logic behind this startling fact is as follows:  all mutual fund managers together provide average investment performance, but in fact, investing in an index fund that matches the average market return can be your best chance of getting an above average return compared to other non-indexing investors.

His theory was supported by three crucial points: superior diversification/allocation, lower annual operating expenses and lower taxes.  Bogle felt that indexers had the advantage of these three things plus steady, cumulative power of broad diversification and lower expenses, not just short pockets of strong investment performance such as in 1995, 1996 and 1997.

 

People Begin to Take Notice

After 3 years of excellent performance, two the world’s most respected financial experts took notice and began to research Bogle’s theories – they wanted to take an acadeic approach to proving his theories.  Rex Sinquefield and Roger Ibbotson sought out to create strong theoretical support for indexing and they did just that. In 1979 they published Stocks, Bonds, Bills and Inflation (SSBI) which is now updated annually and serves as the standard reference for informaiton on investment market returns.  Together Sinquefield and Ibbotson executed a large volume of academic studies examining the performances of mutual funds under actual market conditions establishing, very convincingly, that the ‘beat the market’ efforts of investors who pick stocks and time markets are impressively and overwhelmingly negative. In contrast, they found that indexing stands on solid theoretical grounds, has enormous empirical support and works very well for investors. The message ofindexing is therefore unmistakably obvious: they found that the only consistent superior performer is the market itself and the only way to capture that superior consistency is to invest in a properly diversified portfolio of index funds.

After publishing their study, Sinquefield became the co-chairman for Dimentional Fund Advisors, an index mutual fund manager that began in 1981 – a company that now holds $227.6 billion in assets.  Roger Ibbotson, who was already a professor at Yale, founded Ibbotson and Associates which continued to focus on bridging the gap between academic knowledge and industry practice on asset allocation.  For over 30 years Roger Ibbotson has been committed to delivering innovative asset allocation solutions, helping investors reach their financial goals and providing asset allocation thought leadership to money managers, mutual fund companies and other investors all over the globe.  Still today, Ibbotson supports his roots and is a Board Member, one of 9 “Academic Leaders”, which advises Dimentional Fund Avisors – the world’s leading index mutual fund manager.

You owe it to yourself to check out the benefits of index investing…

Last Minute Tax Strategies for IRAs & Other Retirement Accounts

Posted on by in Estate Tax, Income Tax, IRAs, Roth IRA, Roth IRA Conversions, Tax Law.

Make your 2010 IRA contribution as late as April 18, 2011: 

You can contribute up to $5,000 (or $6,000 if you are 50 or older) until the time you file your income tax return, but no later than April 18, 2011.  If you participate in a retirement plan at work, the IRA deduction phases out if you are married and your joint AGI is $89,000 or more, or if you are single and your adjusted gross income is $56,000 or more.  Filing an extension will not buy you additional time.  Non-deductible pay-ins to IRAs and Roth IRAs are also due by April 18, 2011.

Make a deductible contribution to a spousal IRA:

If you do not participate in a workplace-based retirement plan but your spouse does, you can deduct some or all of your IRA contributions on your 2010 income tax return as long as your adjusted gross income does not exceed $177,000.

Make a contribution to a Roth IRA: 

Contributions to Roth IRAs are not tax deductible, but the earnings on them may be withdrawn totally income tax-free in the future as long as the distributions are qualified.  A Roth IRA distribution is qualified if you’ve had the account for at least five years, the distribution is made after you’ve reached age 59½, you become totally and permanently disabled, in the event of your death, or for first-time homebuyer expenses.  Contribution limits are the same as traditional IRAs, except the maximum contribution for both Roth and traditional IRAs is still limited to $5,000 or $6,000 for persons age 50 or older.

To make a full Roth IRA contribution for 2010, your AGI cannot  exceed $177,000 if you are married or $120,000 if you are single.  You are subject to the same limitations for a non-working spouse.  Subject to some exceptions, I usually prefer Roth IRAs to traditional IRAs or even traditional 401(k)s.

Look into Roth IRA conversions:

The rules for contributions to Roth IRAs are different from the rules for Roth IRA conversions.  Prior to January 1, 2010, you could only convert a traditional IRA to a Roth IRA if your AGI was $100,000 or less (before the conversion).  However, this dollar cap is now removed starting January 1, 2010 and there is no limit to your earnings in order to qualify for a Roth IRA conversion.  Please remember that a conversion to a Roth IRA may place you in a higher tax bracket than you are in now and have other adverse consequences, such as subjecting more of your Social Security to be taxable due to the increase in your AGI.  Please also note that a Roth IRA conversion does not have to be all or nothing. You can elect to do a partial Roth IRA conversion and you can convert any dollar amount you decide is best for your situation.  Our most common set of recommendations after “running the numbers” is usually a series of Roth IRA conversions over a number of years.  Please remember that a Roth IRA conversion may not be appropriate for all investors.

5 Things Taxpayers Can Proactively Do To Best Take Advantage of the New Income and Estate Tax Law

Posted on by in 401(k), 403(b), Estate Tax, IRAs, Tax Law.

There are some BIG changes for taxpayers in the creation of the new 2010 Tax Relief/Job Creation Act.  How can you best respond to this law?  Take a look at these 5 things all taxpayers can proactively do to best take advantage of the changes:

1.  With the money you save on the reduction of your social security tax, you should contribute at least that much additional money to your retirement plan.

2.  Contribute to your retirement plan in the following order:

  • Contribute whatever an employer is willing to match or even partially match
  • Contribute to your Roth IRA and if married to your spouses Roth IRA, even if your spouse isn’t working
  • Maximize your contribution to your Roth 401(k) or Roth 403(b) if available
  • If not available, maximize your contribution to your traditional 401(k) or 403(b)
  • If your income is too high to qualify for a Roth IRA, contribute to a nondeductible 401(k).

3.  Since we have two more years of low tax rates, make Roth IRA conversions.  Consider multiple conversions since you can “recharacterize” or undo them.  If you do multiple conversions, you can keep the ones that do well and undo the ones that don’t.

4.  Review your wills and trusts.  Many, if not most of the wills done for taxpayers with estates of $1 million are now outdated.  Not only will you not get optimal results, but your existing wills and trusts might be a huge restriction on the surviving spouse.

5.  Now that you can either leave or gift $5,000,000 or $10,000,000 if you are married, you should rethink potential gifts to children and grandchildren without tax laws that would otherwise restrict gifts you would like to make.

Recent IRS Notice Lifts Ban on Rolling Over Your MRD

Posted on by in IRAs and tagged , , , .

In response to the economic crisis that kicked into high gear last year, Congress passed the Worker, Retiree and Employer Act (WRERA) of 2008 with the goal of providing older Americans some much-needed relief and flexibility in managing their personal finances. Part of the Act allowed for the suspension of minimum required distributions (MRDs) from IRAs and defined contribution plans. However, WRERA was enacted so late in the year, many retirees and plan administrators were unable to adjust to the new rules and many continued to take their MRDs during 2009.

If you are one of the people who unnecessarily took MRDs all year, you’ll be happy to note that on September 24th, the IRS issued Notice 2009-82 which gives you a second chance to keep the money in your account.  The normal ban on rolling over MRDs is being temporarily lifted and you now have the option to roll the money back into the IRA or defined contribution plan by November 30th for mandatory payments taken before October 1st.  If you took an MRD after September 30th, the deadline for putting the money back into your plan is 60 days after the distribution was made.

Some IRA owners are bound to be disappointed with part of Notice 2009-82.  The IRS did not change the part of the tax code which mandates a one-rollover-per-year rule for IRAs.  If you are an IRA owner who took your MRD in one lump sum – no problem.  You can roll the entire amount back into your plan.  Unfortunately, if you’re an IRA owner who took monthly MRDs, you are limited to rolling back only one of the withdrawals.

If your MRD was not taken from an IRA, but from some other defined contribution plan like a 401(k), this one-rollover-per-year does not apply to you.  Even if you took monthly distributions, you can still roll the entire amount back into your plan.

IRS Notice 2009-82 provides an excellent opportunity to extend your income tax deferral from your retirement account.  Just don’t miss the deadline – November 30th for payments taken before October 1st and 60 days after the distribution for payments made after September 30th.

For a complete look at Notice 2009-82, click on www.irs.gov/pub/irs-drop/n-09-82.pdf.

Jim Lange in Kiplinger’s

Posted on by in Beneficiary Designations, Roth IRA, Roth IRA Conversions and tagged , , .

Roth IRAs and Roth IRA conversions have been Jim Lange’s passion for the past decade and Jim is always happy to spread the word to the media. Jim’s latest appearance in print can be found in this month’s (September 2009) Kiplinger’s Retirement Report (Leave Your Kids a Tax-free Legacy on page 18).

To show the wealth-building potential of a Roth IRA conversion, Jim gives an example involving two 65-year old fathers.  They are both in the 28% tax bracket and both have IRAs valued at $100,000.  To simplify the example, both dads also have $28,000 in a taxable account.

The first dad decides to make a Roth IRA conversion and pays $28,000 in taxes up front.  The second dad decides to stick to his traditional IRA and will pay taxes upon withdrawal.  In Jim’s example, both dads live another 20 years and leave their IRAs to their children.

Thirty years after their parents die, the Roth IRA child has $1.8 million in future dollars.  The traditional IRA child only has $980,000.  Why the big difference?  For starters, the Roth parent never had to take required minimum distributions and the entire amount was able to grow tax-free for all of those years.  The traditional dad had to take an RMD starting at age 70 1/2 resulting in the parent and child paying taxes on the RMD every year.

This analysis really becomes powerful when you realize that a tax-law change starting on January 1, 2010 will make all taxpayers eligible for a Roth IRA conversion, regardless of income.  Considering that many wealthy taxpayers will be able to convert much more than the $100,000 in the example, the potential benefits of a Roth IRA conversion could be even more dramatic.

In the same Kiplinger’s article, Jim also stresses the importance of the beneficiary designation of your IRA.  If you hope to have your heirs stretch this tax-free shalter for their lifetimes, it’s important to get the wording correct.  Non-spouse heirs cannot roll an inherited IRA into their own Roth IRA.  Instead, they must set up an inherited IRA and the name of the deceased must remain on the account.  Jim advises using language along the order of “inherited IRA of Joe Sr. for the benefit of Joe Jr.”.  The money must then be transferred directly into the new IRA.

Remember – we are less than four months away from the big tax-law change.  Make sure that you’re up-to-speed on the benefits of Roth IRAs and Roth IRA conversions.  For a more detailed comparison between traditional IRAs and Roth IRAs, we offer another of Jim’s articles on this website.  Go to the homepage, click on articles and then click on Roth: Four Little Letters Lead to Long-term Financial Security.

As always, our excellent professional staff is available to help you with a complete Roth IRA analysis.  Get more details by calling our office at 800-387-1129.

New York Times Analyzes Roth IRAs

Posted on by in Roth IRA, Roth IRA Conversions and tagged , , , , .

The Tuesday, July 21st edition of The New York Times had an article titled “Converting an IRA Into a Roth? How’s Your Crystal Ball?”. Naturally, this got our attention. Jim Lange was at the forefront of the Roth movement when he wrote the first peer-reviewed article on Roth IRAs for The Tax Adviser in 1998.  Since then, Roth IRAs and Roth IRA conversions have been Jim’s passion.

For many taxpayers, Roth IRAs have not been on their radar because of the income limitations.  Currently, if your household’s adjusted gross income is over $100,000, you don’t qualify for a Roth conversion.  However, a big change is about to take place.  Starting January 1, 2010, all taxpayers will be eligible for a Roth IRA conversion regardless of income.  If you are unfamiliar with Roth IRAs, here’s how they work.  With a traditional IRA, you take a tax deduction now and pay income taxes when you withdraw the money.  With a Roth IRA, you pay the taxes up front and then your money continues to grow income tax-free for the rest of your life and, perhaps, even the lives of your children and grandchildren.

As we get closer to the tax-law change in 2010, not only is interest in Roth IRAs heating up, but so is speculation that the rules may change down the road.  The New York Times article suggests that in the worst case senario, the federal government might try to tax the earnings on a Roth IRA after all.  Or, perhaps, the feds might impose a penalty tax on excessive balances.  This argument is especially hot right now considering the massive and growing federal budget deficit.

Others believe that Roth IRAs will remain the same, but all other accounts would change to be like them.  That means contributions to traditional IRAs would no longer be tax-deductible and pretax savings in 401(k)s and similiar plans would also stop.

Does that mean that you shouldn’t consider a Roth IRA conversion?  Not at all.  As The New York Times also mentions, many advisors believe that Roth IRAs will not only remain the same, but will become even more valuable if income tax rates increase.

If you’ve ever been to one of Jim Lange’s Roth IRA workshops, he answers the question about a possible tax-law change governing Roth IRAs by pointing out that Roth IRAs are part of The Internal Revenue Code (as opposed to Social Security taxes – which were never part of The Internal Revenue Code).  If this law were suddenly changed and taxes imposed at withdrawal, Jim has said in his workshop that this would be “a violation of due process, a violation of the constitution, and you would have a very well-financed revolution”.

Listen to the July 15th edition of The Lange Money Hour which featured one of America’s top IRA experts, Natalie Choate, and you’ll find that Jim and Natalie both agree with two other points made in The New York Times’ article.  First of all, if you don’t have the money to pay for the taxes on a Roth IRA conversion outside of your retirement plan, you should probably not convert.

Secondly, it’s not a good idea to do a 100% conversion.  As Natalie put it, “don’t put all your money on one horse”.  It’s not a good idea to ignore the Roth IRA, and it’s also not a good idea to have all of your money in a Roth IRA.  Diversification is key.

Jim Lange and the rest of our team are still very excitied about the possibilities ahead with Roth IRAs and Roth IRA conversions.  If you’re wondering what to do, we recommend a professional analysis of your situation.  It’s possible that a series of small conversions would work best for you.  The professional staff here has been doing thorough Roth IRA projections for years.  You don’t have to wait until 2010 to get started – for help, call the office at 800-387-1129.

Michael Jackson’s Estate

Posted on by in 401(k), Estate Planning, IRAs, Roth IRA Conversions.

The circus surrounding Michael Jackson’s death and estate will, no doubt, continue for months, possibly years. No matter what you may think of Michael Jackson personally, we can all learn some lessons from the way that Michael set up his affairs.

For starters, Michael took the time to consider the matter of guardianship for his children.  Some believe that his choice is unwise – naming his 79 year-old mother, Katherine, as guardian and 65 year-old singer Diana Ross as contingent guardian.  The important thing to remember is that Michael obviously gave this considerable thought and wanted to make sure that his wishes were known.  It’s very important that all parents of minors do the same thing and take the responsible step of putting their wishes in their will.

Michael’s will was relatively straightforward — have a look for yourself  – http://www.docstoc.com/docs/8016703/Michael-Jacksons-Will. The will is a pour-over will which basically says that all money or property that has not already been transferred into a trust should be transferred into a trust at the time of death.  For medium or large estates, a pour-over will with a family trust is an excellent way to avoid probate and to maintain some privacy since details of a trust are, in most states, not a matter of public record.

Sorting out the details of Michael’s financial situation will take quite some time.  One of the reasons is that much of Michael’s estate was not liquid.  The value placed on his main asset, a 50 percent interest in the Sony/ATV music catalog, has been reported to be worth anywhere from $500 million to $1.5 billion.  In addition, the estate is burdened by personal debt in the neighborhood of $500 million.

One lesson to be learned from this example is that if you have assets that are hard to value and not terribly liquid, you should consider life insurance.  If set up correctly, the life insurance proceeds would be tax-free and could be used to pay debts of the estate and taxes on the estate.

Finally, a piece of advice in the event that you leave behind a 401(k) plan.  While little is known about Michael Jackson’s estate planning, let’s assume that he got good advice and had set up a 401(k) plan.  If the 401(k) plan was left to Michael’s children, they could make a Roth IRA conversion of that plan in 2010.  They would pay income tax on the plan now, but all future growth of the plan would be income tax-free.  Considering the ages of Michael’s children, the difference would be measured in millions of dollars over their lifetime.

One interesting side note – if Michael had put his money into an IRA instead of a 401(k), his children would not have the option of making a Roth IRA conversion of the inherited IRA.  The ability of heirs to make a Roth IRA conversion is just one of the potential benefits of keeping your money in an existing 401(k) plan instead of doing a rollover to an IRA.

These lessons taken from Michael Jackson’s estate just scratch the surface.  There is much to be learned in the way Michael dealt with his estate while alive and we have put together a more in-depth article which you can access through our homepage by clicking on articles.  We will also be including this piece in our next newsletter.  If you aren’t receiving our newsletter, it’s easy to sign-up.  Go to the homepage of this website and click on e-newsletter sign-up on the left-hand side.